Filling out tax forms is necessary for any small business owner or if you are an employee. Figuring out how to fill them out correctly, however, is easier said than done. This is especially true as Form W-4, Employee's Withholding Certificate, has been overhauled as a result of the Tax Cuts and Jobs Act (TCJA).
Submitting a W-4 is an essential step in employment. Employers who fail to issue a W-4 to employees or employees who fail to submit a W-4 can result in major problems with the IRS.
Before providing W-4s to employees or if you're an employee filling out Form W-4 yourself, it's essential to understand what this form is, why it's important and how to fill one out.
What is Form W-4?
The W-4 Employee's Withholding Certificate is used to determine how much tax an employer is supposed to take out, or withhold, from each employee's paycheck and submit to the IRS.
The W-4 is one of the most important tax forms employees must fill out when they start a new job. By claiming certain exemptions, they may receive significantly more money each month. Understanding this form is essential in 2020, especially since it's changed this year as a result of the TCJA.
By declaring certain income tax withholdings and submitting other information about an employee, such as whether they have dependents, they can qualify for a reduction in the amount of tax withheld from their regular paychecks. Employees should fill out both the W-4 truthfully; if there's a mistake, employees will likely have to pay the difference in taxes when they file their yearly return in April. In a worst-case scenario, they may be subject to certain fees or penalties.
Who needs to fill out Form W-4?
Before explaining how to fill out a W-4 form and how the form is different in 2020, it's important to first understand what types of workers need to fill out a W-4.
From an employer perspective, it's especially important to understand which individuals qualify for Form W-4 and which ones qualify for Form 1099.
If you hire independent contractors on a per-project or per-day basis, you will use Form 1099. This form declares how much money a contract worker receives. Employers don't have to withhold any taxes. Instead, as the employer, you will report the compensation you paid to the individual and the IRS. The payee is responsible for paying the taxes on those earnings quarterly or annually. As a result, 1099 workers must fill out Form W-9, not Form W-4.
Is there a new W-4 for 2020?
The new W-4 eliminates the section for personal allowances. In the past, W-4s allowed employees to claim individual personal allowances. It also had an attached worksheet to help determine which allowances a person could qualify for. All of this affected how much money employers would withhold from an individual's paycheck.
One of the aspects of the TCJA, however, was to simplify this form. Instead of filling out seven sections, like in years past, Form W-4 now has only five sections. The form can now be as simple as providing basic information, including your Social Security number, and signing the certificate.
How to fill out Form W-4
Below are the basic steps to filling out Form W-4. Essentially, if you – the employee – are single, married to a spouse who doesn't work, don't have children (or other dependents), have only one job, and aren’t planning to claim tax credits or deductions, the form is as simple as providing your personal information and signing at the bottom.
If those other scenarios apply, though, keep reading for a brief explainer on each step.
Step 1: Personal information
This step is the most self-explanatory on the W-4 form. In this section, you'll provide your first and last name, address, your Social Security number, and your filing status. Your filing status can be broken down into three main categories: Single, married filing jointly and head of household. The filing status you claim directly impacts how much money is withheld from your paychecks.
Step 2: Multiple jobs or spouse works
If you hold multiple jobs or your spouse works, you must fill in this section. The qualifiers for this section are explained on the form. If this section applies to you, there are three options you can pursue:
- Use the IRS's online Tax Withholding Estimator and enter the estimated amount on line 4(c) of Step 4.
- Turn to the third page of your W-4 and use the Multiple Jobs Worksheet. Follow the instructions and include the estimated withholding amount on line 4(c) of Step 4. (If you have two jobs that provide similar pay, you can check the box in item (c) found under Step 2. You should do the same on the W-4 for your other job as well. This option is only ideal if both jobs have similar pay. Otherwise, more taxes may be withheld than what is necessary.)
Step 3: Claim dependents
This step applies if you have children or other dependents. By filling it out, you could qualify for tax exemptions and other credits related to your dependents.
This section only applies to filers who earn less than $200,000 a year (or $400,000 if filing jointly). If this applies, you may receive up to $2,000 for every child under the age of 17. For other dependents, you could receive $500.
Calculate the amounts by the number of children or other dependents, then add up the numbers and enter the amount on line 3 at the bottom of Step 3.
Step 4: Other adjustments
This section can be used to further balance tax withholdings from additional income derived from sources other than your job(s). You can also arrange to have extra witholdings from each paycheck so you avoid paying large sums later. There are three subsections to step four:
- 4(a): This section deals with investment income. If you receive non-job income that needs to be withheld for tax purposes, you need to list that amount here. Examples of other income include earned interest, dividends and retirement accounts.
- 4(b): Section 4(b) is focused on deductions. There is a Deductions Worksheet on page 3 of the W-4 that you can use to assess the amount of income you don't want withheld. The types of deductions you can claim are itemized deductions, which differ from the standard deduction, as explained on the W-4 form.
- 4(c): In this section, you can elect to withhold any additional money from your paycheck. This can include income and withholdings from second and third jobs. Again, strive for accuracy. While that may mean more money will be withheld per paycheck (and thus, less money for you to use in the short term), you'll avoid paying large sums when you file your yearly tax return.
Step 5: Signing the form
Much like step one, step five is self-explanatory. The employee will need to sign and date the form, certifying that the information provided above is true and accurate. Below step five is a section for the employer, where basic information should be provided.
W-4 FAQs
Below is a roundup of common questions related to Form W-4.
What is the W-4 form used for?
Form W-4, the Employee's Withholding Certificate is used by employers to calculate how much income tax should be withheld from an employee's paycheck. If sufficient taxes are withheld, employees can avoid having to pay a large sum to the IRS at the end of the tax year when they file their yearly returns.
Do independent contractors fill out W-4?
No, independent contractors classified as 1099 workers need to fill out Form W-9, Request for Taxpayer Identification Number and Certification. The W-9 is essentially a W-4 but for independent contractors.
What is the difference between a W-2 and a W-4?
Form W-2, Wage and Tax Statement, reports how much the employee was paid and how much tax was withheld. The W-4 designates how much of that income should be withheld by the employer. The witholding amount is determined by the employee's income level, their marital status, whether they have dependents, whether they qualify for itemized deductions, and how much "non-job" investment income they earn.
Do you claim 0 or 1 on your W-4?
An employee no longer has to claim 0 or 1 on their W-4 form. In the past, this was an important step in determining how much money should be withheld for taxes, but the IRS is using a new system. The new 2020 W-4 simplified the process so that workers no longer have to calculate and file personal allowances like in years past.
How does a W-4 affect your tax return?
For employees, the amount of taxes withheld from their paycheck has a direct impact on the taxes they pay. The W-4 Employee's Withholding Certificate determines their tax withholding. By underreporting the amount to be withheld, the employee must pay the difference at the end of the tax year. If they overreport, they get a tax refund. However, by accurately filling out the W-4, they can ensure they don't have to pay additional taxes when they file their return in April and that they don't overpay the IRS.
To whom do you submit your W-4?
Your W-4 Employee's Withholding Certificate should be provided to you by your employer. When you finish filling it out, return it to your employer, who will process the form and submit it to the IRS.